Sheriff, CEO Call Tax Hike Crucial to O.C.’s Future

Sheriff Brad Gates and County Chief Executive Officer William J. Popejoy warned Tuesday that schools and cities will never be repaid in full and other county creditors will receive only a small fraction of what they are owed if voters reject a half-cent hike in the sales tax later this month.

“It comes down to civic responsibility. It comes down to sitting and looking in the mirror on June 27 and saying, ‘What do you want the future of this county to be?’ ” said Gates, offering for the first time a “Plan B” that describes what will happen if the sales-tax measure known as Measure R fails.

At a news conference, Gates said that without Measure R--which is expected to raise at least $130 million a year for a decade--the county would have just $335 million available over the next 14 years to pay more than $1.5 billion in debts, much of it owed to the schools, cities and special districts that had money in the county’s investment pool.

Gates, who is heading the campaign in favor of the tax measure’s passage, predicted that participants in the county’s failed investment pool would be stiffed for at least $550 million worth of IOUs the county said it would use its best efforts to repay; that vendors would receive only about 20 cents for every dollar they are owed; and that bondholders would get back only 50% to 60% of the face value of their holdings.

“Many people are voting No on Measure R because they are mad at the supervisors,” said Gates, leader of the Yes on R campaign. “A No vote will not punish the supervisors. It will punish honest local business people who won’t be paid, schoolchildren who will have the quality of their education reduced, tens of thousands of local citizens who hold county bonds . . . and every taxpayer who will be stuck with the added cost of this bankruptcy for years.”

“Plan B is bad for everyone but lawyers,” Gates warned. “Orange County will be in court for years fighting with angry vendors, bondholders and others who feel they’ve been cheated, and we, the taxpayers, will pay hundreds of millions to attorneys.”

Mark Thompson, who is running the campaign against Measure R, denounced Gates’ description as a “fraudulent” political stunt.

“What Brad Gates is doing is fraud. What his press conference was about is just another campaign tactic to scare people,” Thompson said. “He’s fraudulent in calling it a Plan B. He’s saying, that’s what happens if we don’t pass Measure R. He called doing nothing a ‘Plan B.’

“There are always lots of people saying, ‘We can’t do this kind of thing or that kind of thing,’ ” Thompson added. “What we need is people who say, ‘How can we do this?’ ”

But Gates and Popejoy insisted that the county and its financial and legal consultants have reviewed every financing alternative and find none other than the sales-tax proposal that can raise the needed revenue in time.

“There is no bailout coming from Sacramento, and I’m afraid Santa Claus is busy this year,” Gates said. “When you turn around to look, and say, ‘Where are those answers?’ we don’t find any. And we’ve had a lot of smart people looking with us.”

Gates’ estimate of the amount that would be available to repay the county’s debts does not include what the county hopes to win in its damage suit against Merrill Lynch & Co., the giant Wall Street brokerage which sold the county most of the risky investments that cost its investment pool nearly $1.7 billion in losses and forced the county into bankruptcy.

As part of the bankruptcy settlement agreement for the investment pool, the cities and special districts that agreed not to sue the county were supposed to be paid roughly 11% of their investment pool balances from proceeds of this litigation.

The news conference came just days after a Times Orange County Poll showing that 45% of voters oppose Measure R and 40% support it. The two county leaders said they were focusing their efforts on the hefty chunk of fence-sitters, as well as those--at least 28%, according to the Times survey--who plan on voting No because they don’t want to pay for the mistakes of others.

“What we’re hearing is they’re mad, mad, mad. I think anger is the overwhelming issue here,” Popejoy said. “We’re trying to get them to think, ‘How many good decisions did they make in their lives when they were mad?’ This is not a decision to be made in anger. This is a decision to be made in cold, hard logic.”

According to the grim economic forecast unveiled Tuesday, Orange County officials expect the following in available revenue to repay debt if Measure R fails:

* $70 million in proceeds from an June 20 auction of county properties;

* $50 million this year in proceeds from a refinancing of one set of outstanding county bonds;

* $140 million over the next 14 years in annual proceeds from the refinancing of so-called Teeter notes; and

* $75 million over the next 14 years in profits from a new plan to import trash from outside the county.

“None of the other sources of revenue suggested by Measure R opponents are real,” Gates said, adding that he believes John Wayne Airport and county landfills could never be sold and that revenues from the transportation tax known as Measure M could not be diverted to the bankruptcy recovery effort for nearly a decade.

Gates and Popejoy said they have outlined a hierarchy of debts to be repaid.

At the top, to be paid in full regardless of Measure R’s fate, are $100 million in trust accounts held for people who won court settlements, and debts the county owes to the state and federal government, plus $40 million in legal and accounting fees connected to the bankruptcy.

For the bondholders, the county has about $430 million in reserves to pay about $800 million in outstanding short-term debt coming due this summer. Beyond that, Popejoy and Gates said investors can expect to get 10 to 20 cents on the dollar back.

Vendors who performed services for the county before its bankruptcy would also get paid only 10% to 20% of what they are owed. About $350 million still owed cities and special districts that had money in the county-run investment pool would also fall into this second class of debt, along with about $100 million the county itself lost.

These groups might get a bigger chunk if the county wins a settlement from Merrill Lynch, but Gates guessed that they would never reap more than half of what they are owed.

“We don’t have the wherewithal to fully repay them,” Popejoy said. “That’s nothing we’re proud of, but those are the facts.”

Finally, Gates and Popejoy outlined a third priority of debt--a level they said the county would never reach for repayment without boosting the sales tax. At that bottom rung sits the last 10% owed to each of 200 schools, cities and other local agencies that had money in the investment pool when it went belly up.

“You have people on city councils that say they want 100 cents on the dollar back, they’re adamant. They send us letters, they protest, then they vote against Measure R,” Popejoy complained. “I don’t know where they think it’s coming from.”

Patrick C. Shea, the attorney representing the pool participants, said he supported county leaders’ attempt to sway the vote in their favor. But he said that any decision about what debts will be paid when must await a bankruptcy plan of adjustment in the case.

“That approach, at this point, is intended to try and prompt people to vote in favor of Measure R. I have no objection with them being as persuasive as they can be. I think it’s the right thing to do,” Shea said. “However, I don’t have any basis upon which to comment about whether their assumptions and projections are correct.”

Popejoy said he considered Tuesday announcement a warning, not a threat.

“We don’t want people to come back after the fact and say, ‘We thought you had a Plan B.’ We don’t have a Plan B. We would like to have a Plan B--we don’t even have a strong Plan A,” Popejoy said. “We’re not trying to scare people into voting for Measure R--we’re just trying to put to rest, once and for all, that there is no Plan B. Plan B is really just a bad scene going forward.”